Brazil

Why the Cancun Climate Talks Matter The sixteenth annual UN climate negotiations kick off today in Cancun. I’ve got a couple pieces out this morning looking at different aspects of the talks, in the Wall Street Journal and at Slate. My piece in the Journal is summed up pretty well in its first couple sentences: “As the United Nations climate talks open today in Cancun, here’s my advice for Washington: Stop focusing on China. If fact, I’d go a step beyond that, and suggest the U.S. focus on everyone but China—and in particular China’s partners in the Basic climate-negotiating bloc: India, South Africa and Brazil. Indeed, that may be the best way to move Beijing.” Readers of this blog may be familiar with parts of this argument. I also talk about how the U.S. should approach Europe; if I’d have had more space, I’d have also written about how the U.S. should deal with Mexico and the G-77. But the bottom line is that if the U.S. wants support for its strategy, it needs to earn it; it can’t simply focus on China and expect others to back it up. Over at Slate, I make a broader case for why the Cancun climate talks matter. It’s not that meaningful progress is likely – far from it. Rather, what matters is that Cancun could be a significant setback if it isn’t handled right. The reality is that even those of us who don’t love the UN talks are stuck with them, and we need to make the best of a bad situation. Here’s my basic argument: “Reporters, opinionators, and analysts are right to have limited hopes for Cancun, but dangerously wrong if they think the meeting is unimportant. Last year’s talks produced the ‘Copenhagen Accord’, a political agreement that was roundly savaged. Yet the Accord is more valuable and important than most assume—and its future is at risk in Cancun. If negotiators let it die, as many privately wish, they will not get something closer to their ideal; they will get nothing.” Of course, for some, “nothing” may in fact be the ideal. But anyone who thinks that a blowup in Cancun will lead smoothly to a nice G20 or MEF-focused climate process is kidding himself. It is far more likely to lead to a Kyoto-II-style arrangement where the United States is once again marginalized. Better to have a basic framework based on the Copenhagen Accord as the contribution that the UN process can make; then we can do other things primarily elsewhere. There are many other interesting (and occasionally infuriating) pieces out there to kick off the talks. The New York Times published two on Sunday: a largely smart piece by David Victor and V. Ramanathan on cutting black carbon and ozone; and a somewhat confused piece by former EcoSecurities CEO Bruce Usher, who may be the only person who still thinks that a big U.S.-China climate deal might be the cards. The Journal, meanwhile, carries a more-interesting-than-usual essay from Ted Nordhaus and Michael Schellenberger. It’s all over the place, with some parts more convincing than others, but the part I’m drawn most to concerns the balance between international competition and cooperation on clean energy. (That’s something I’ve written quite a bit about recently.) Ted and Michael are right, I think, to emphasize that some protectionist actions may be necessary to get cleantech-supporting policies off the ground; they’re also right that, if those go too far, they’ll stifle innovation. But I’m skeptical of their solution, which mostly does away with IP and substitutes government contracts for the market in driving innovation.  That might make sense for a lot of early stage R&D (though I wouldn’t be as cavalier as them about IP), but it strikes me as fundamentally incompatible with the American economic system once you get into later stages of the innovation process. Regardless, I’m glad to see others writing about the challenges involved with making clean energy innovation work at a global scale; this is an area that’s ripe for more scholarship and debate.

I co-authored an article on innovation in clean-energy technology in Foreign Affairs with my CFR colleagues.

I had the privilege of participating in a workshop last week in Shanghai that included participants from all four BASIC countries (Brazil, South Africa, India, and China). Our conversations took me back to a question that’s been bothering me since the rise of the BASIC coalition last year, and its influential (and in many ways very counterproductive) influence at Copenhagen. With BASIC set to continue its role as a major negotiating coalition, it’s important to make sure we understand what motivates each of its members to negotiate collectively. Here are some thoughts: China: This, to me, is the easiest one to explain. BASIC’s continuing core positions – insistence on continuing Kyoto, rejection of broad MRV and transparency, opposition to any system that adds nuance to the rich/poor distinction established through the UNFCCC – coincide with the positions that China would have taken by itself. What China gets out of BASIC is three other big countries to back it up. India: India has no inherent need to resist MRV and transparency. (Neither do Brazil or South Africa.) It might even benefit from a more nuanced rich/poor distinction, depending on how that was established. India became part of BASIC because it was afraid that China would cut a deal with the United States and hurt it in the process. BASIC is its way of keeping an eye on China. The United States could help soften Delhi’s affinity to the group by continuing to reassure India that it isn’t about to screw it. Brazil: Brazil, like India, has little to gain from most of the BASIC negotiating positions. Indeed any plausible international climate arrangement would probably deliver Brazil a lot of money through schemes to pay for avoided deforestation. But Brazil places a lot of importance on being a defender of Africa. (It’s all about the politics of its long-dreamed-of Security Council seat.) And it sees keeping the sharp rich/poor distinction in the UNFCCC – a key BASIC position – as part of that, arguing that anything else would create a slippery slope to new obligations for the world’s poorest. It’s not clear how to deal with this, except for sweetening the upside, and working through African countries to influence Brazil. South Africa: Once again, the BASIC positions make little sense for South Africa. But South Africa gets one big thing out of BASIC: a seat at the top-level table. The price is that it has to advocate the Chinese position once it gets there. Alas, international climate politics is often as much about process and representation as about actual substance. The best that the United States can do to soften South Africa’s affinity to BASIC is to reassure it that it will have a seat at the table regardless. How to do this credibly, of course, is anyone’s guess.

Dilma Rousseff, favored to win Brazil’s upcoming presidential runoff, would likely fall short on economic reform and tone down the current president’s "hyperactive diplomacy," says analyst João Augusto de Castro Neves.

The difference between Greek and German government bond yields can be used to estimate the market’s view of the likelihood of a Greek default. The chart above shows these probabilities over different time frames on three different dates. On April 30th, no European plan was yet in place to address the ballooning Greek debt, and default was considered a real possibility in the short term. On May 11th, just after the European Stabilization Mechanism (ESM) was announced, markets sharply cut their view on the odds of default across all time horizons. However, the market’s analysis of the ESM has become much more nuanced since then. On September 1st, the market’s view of the probability of default within two years was lower than before the ESM was announced, but higher over longer time frames. Greece will happily borrow from the ESM to avoid having to close its primary deficit (that is, excluding interest payments) too rapidly. Yet if Greece is successful in eliminating its primary deficit, its temptation to default will actually grow, as it can wipe out huge amounts of accumulated debt without any longer needing the financial markets to fund current expenditures. If faced with the choice between paying Greek debts and letting Greece default, its northern neighbors may, once their banks are on more solid footing, find it more attractive simply to let Greece default. This is the story line that the markets are now pricing into government bond spreads. Davis: IMF Warns Countries of Debt Risks, Dismisses Idea of Greek Default Harding: Greece Debt Default Seen as ‘Unlikely’ Economist: An Uneasy Calm Economist: Greece's Reforms

The Times of India reports this morning that the next climate strategy meeting of the BASIC countries (Brazil, South Africa, India, and China) will include “participation from smaller countries such as Yemen, Rwanda, and Venezuela”. Those might seem like marginal players at first glance, but they could play decisive roles at the climate talks in Cancun later this year. The United States and its partners should beware. Heading into the Copenhagen summit last year, many observers (myself included) saw the talks almost entirely as a negotiating exercise for the big countries. The great mass of smaller developing countries, though, ended up playing a pivotal role. Until the last few days, solidarity among the G-77 group of developing countries and China allowed the bigger emerging economies to resist meaningful concessions under the cloak of protecting the world’s poorest. Only when the G-77 began to split (spurred in large part by a major financial offer from the United States) did China finally start to feal the heat. That, as much as anything else, explains why a final deal (no matter how paltry one thinks it was) was possible. Even then, though, the resulting Copenhagen Accord was tarnished due to the inability of the plenary to adopt it, a result primarily of objections from the “ALBA” group of Bolivarian countries. What does all this have to do with the next BASIC meeting? Yemen is the representative of the G-77 this year. Venezuela is the most forceful member of ALBA. (I have no clue what Rwanda is doing there.) To the extent that BASIC can get these countries on board with its strategy for Cancun, a repeat of the divide-and-conquer act from Copenhagen becomes more unlikely. Don’t get me wrong: I don’t have high expectations for Cancun. But I’ll have even lower ones if BASIC, the G-77, and ALBA are all working together. I’ll also expect the United States to take more of the blame for whatever failures the conference has. BASIC has had several meetings this year to coordinate strategy for Cancun. Where is the similar effort for the United States, Europe, and Japan? Those countries neglect careful coordination among themselves, and collective outreach to the smaller developing countries, at their peril.

In his recently published memoir, former Treasury Secretary Henry Paulson claims that Russian officials approached the Chinese in the summer of 2008 suggesting that both countries sell large amounts of debt issued by U.S. Government-Sponsored Enterprises (GSEs), such as Fannie Mae and Freddie Mac, in order to pressure the United States into explicitly backing these companies. Paulson, who found the report “deeply troubling,” claims that China opted not to collaborate with Russia. Nonetheless, both countries dumped GSE debt that summer, as illustrated in the figure above. Russia sold $170 billion during 2008, while China sold nearly $50 billion between June 2008, when its holdings peaked, and the end of 2008. During this fire sale the yield spread between GSE debt and U.S. Treasury debt soared, as illustrated in the figure below. As GSE debt was widely used as collateral in the U.S. repo market, U.S. financial institutions were obliged to quickly pony up more securities to support their borrowing. This exacerbated the growing credit crunch. The U.S. government was forced to put the GSEs into conservatorship in September 2008. Secretary Paulson was more right than he realized to be concerned. The episode highlighted the clear risks to the United States, and indeed the wider world, of growing American dependence on foreign government lending. Steil, Swartz: Dangers of U.S. Debt in Foreign Hands Setser: Sovereign Wealth and Sovereign Power Setser: Central Banks Aren’t Always a Stabilizing Presence in the Market McKee, Nicholson: Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds

The Brazilian-Turkish agreement with Iran on enriched uranium was part of Brazil’s effort to project the power to "solve conflict through negotiation," says Brazilian international affairs expert Antonio Ramalho.

CFR.org asked me to write up some quick reactions on the nuclear "deal" announced by Iran, Turkey, and Brazil earlier today. I’m underwhelmed: deals that involve only one major party to a dispute tend to leave me cold. Perhaps the United States and Israel will announce their own deal on military options some time in the future. In any case, my take is here.

The United States has always seen Brazil as a significant regional powerhouse, but its perceived importance has risen in the last decade. Due to Brazil’s economic strength, its hemispheric leadership, and its growing geostrategic role through multilateral international forums, it has become a vital player in both regional and global politics across numerous dimensions. While US recognition of Brazil’s political and economic emergence brought the question of how Washington should manage relations with Brasilia to the fore, the ability to translate this new awareness into concrete bilateral policies and partnerships remains difficult. Whether the US and Brazil will be willing and able to form a ‘special relationship’ remains unclear.

The credit risk of oil exporting countries such as Venezuela and Russia tends to move with the price of oil. As a country’s oil export revenue improves, so does its ability to pay its debts. Recently, however, Venezuela’s CDS spreads have increased even while the price of oil has been stable. The market’s perception of an increased risk of default coincides with the Venezuelan government’s move to close banks representing 8% of the country’s deposits. On Tuesday December 15th the Venezuelan National Assembly passed a law increasing depositors’ insurance in an effort to prevent a run on the banks. Problems in the financial sector have become the primary driver of Venezuelan sovereign credit risk. Molinski: Venezuela Lawmakers Approve Bank Reform Plan Carroll: Aides In Firing Line As Hugo Chávez Targets Bank Corruption In Venezuela AFP: Venezuela Passes Banking Law Raising Govt Control

The size of the market for commercial paper in the U.S. has fallen dramatically since its peak in July 2007. After the disruptions of the Asset-Backed Commercial Paper (ABCP) crisis in August 2007 and the Lehman bankruptcy, the Federal Reserve created a commercial paper funding facility to restore liquidity. However the market for commercial paper has continued to shrink in 2009 straining financial intermediaries who have relied on the market for funding. FRB: Commercial Paper Reuters: U.S. Commercial Paper WSJ: Commercial Paper Outstanding Keogh, Condon: Commercial Paper Falls Most Ever

Some assets on the Fed's balance sheet are short-term credits than could be withdrawn easily if confidence in financial institutions returns, but the Fed has also been buying longer term assets that are harder to unwind. Should the Fed keep buying assets to signal its determination to fight deflation, or does the Fed need to think about how to unwind some of the programs to demonstrate that the expansion of its balance sheet won't lead to inflation? Guha: Fed Lines Up Exit Strategy to Damp Inflation Lanman, Torres: Bernanke, Kohn Pledge Fed to Withdraw Credit When Crisis Ends Hilsenrath: For Fed, Big Test Will Be When to Turn Off the Money Pump Zumbrun: Don’t Fight the Fed. Please.

The Fed recently reaffirmed its determination to expand its balance sheet. The crisis has already driven it to take on risky assets such as agency bonds and commercial paper. It has also lent to weak financial institutions, and is expected to participate in the Treasury's public-private partnership to buy toxic assets. The expansion has averted a crippling credit contraction. But the Fed could lose money by taking on risk. FOMC Statement Bernanke: Four Questions About the Financial Crisis Economist: The Fed Guha: Fed Move to Buy Treasuries Stuns Investors FT: Bold Bernanke Economist: Central Banks Update (5/26/2009): Per suggestion from C.F. Reader